In recent weeks we’ve been writing about productivity and what it means for the economy and market performance. One key ingredient in productivity for many firms is the just-in-time production model. Some forward-thinking people believe that just-in-time businesses will smooth out or even eventually eliminate recessions. They have a good point. Just in time – the practice of optimally delivering a product almost immediately after it is ordered — makes companies more flexible, efficient and responsive. It’s hard to overstate its positive impact. Let’s take a closer look.
Just-in-time is big, and it’s growing
Just-in-time didn’t exist 25 years ago. Now just in time has infiltrated nearly every industry everywhere. Thanks to digital cash registers, bar codes, UPCs, massive databases that can assist with demand forecasting, drop-shipping services, shipping container management, and automated order routing… companies are able to operate customized sophisticated just-in-time networks that were not possible years before. Companies like Wal-Mart that practice just-in-time logistics know instantly where orders are coming from, how they are being influenced, and how they can be optimized for cost savings.
After 25 years of collective business experience with computerized just-in-time optimization, there’s still room to grow. There are still many businesses out there that can add to their bottom lines by continuing to replace clipboard style procedures with APIs and software. We are nowhere close to reaching our full just-in-time economic potential.
Just-in-time makes it less risky for business owners to expand to new products or markets while controlling the scale of future liabilities. This is where the recession buffer comes into play. It’s possible for companies of all sizes to keep their earnings relatively steady by continuously matching their costs to revenue prediction models.
The entertainment industry is a great example of just-in-time magic with its ability to instantaneously distribute music, movies, and video games at little to no added cost. Compare this to Atari which nearly bankrupted itself when overconfident sales projections led to costly unsold inventory. Target Canada opened in 2013 and bankrupted itself in 2015 after the inventory management system was set up incorrectly. In 2019, just-in-time is solving many problems like these by reducing waste, time lags and bottlenecks.
The just-in-time workforce
Using the same digital principals as supply chain managers, companies can scale up their workforce cost-effectively by embracing the distributed workforce as the new norm. The distributed workforce are those who work away from a central company hub. The real news is that today 5% percent of all full-time workers now work from home, nearly 8 million Americans, and that’s double the rate from 15 years ago. And it’s estimated by Gallup that over 40% of all workers have worked from home at some point. We expect that trend to continue.
Most of those workers are located in low-cost locations. It is much cheaper to hire a programmer in Indianapolis ($84K/yr) than in San Francisco ($125K/yr). After you factor in the adjusted buying power, $84K/yr becomes a whopping $177K/yr in San Francisco dollars. Not only is it less expensive, but it’s often much easier to quickly hire remote workers than to find available local talent in tight markets like San Francisco, Austin and Denver. With an unrestricted supply of workers working from home, it becomes easy to scale up and scale down just-in-time. For these reasons you can expect much more distribution of workers going forward.
Just-in-time for the second quarter
We will get a front row seat on just-in-time performance in the US in the coming weeks as earnings are released. Global companies will be influenced more by tariffs this quarter than ever before. I suggest remaining fully invested through the noisy earnings period for simply the reason that the just-in-time engine is ramping up and improving every day.